Clean Price vs Dirty Price: Accrued Interest Explained

When you buy a bond between coupon payment dates, the price you see quoted is not the price you actually pay. Bond markets distinguish between the clean price (the quoted price) and the dirty price (the settlement price that includes accrued interest). Understanding the clean price vs dirty price distinction is essential for accurate bond valuation and trading. This guide covers the difference, the accrued interest formula, day count conventions, and common pitfalls. For a structured video walkthrough, see our Fixed Income Investing course.

What is the Dirty Price?

When a bond trades between coupon dates, the seller has held the bond for part of the current coupon period and is entitled to a pro-rata share of the next coupon payment. The dirty price compensates the seller for this accrued interest. At settlement, the buyer pays the dirty price and — when the next coupon arrives — receives the full coupon payment, effectively reimbursing themselves for the accrued interest portion they paid upfront.

What is the Clean Price?

Why don’t markets just quote the dirty price? Because accrued interest grows daily and resets to zero on each coupon payment date, creating a sawtooth pattern. If dirty prices were quoted, bond prices would appear to jump up and down every coupon period — even when the bond’s actual market value hadn’t changed. By quoting clean prices, markets strip out this mechanical accrual effect and show only the price movements driven by interest rates, credit conditions, and supply and demand.

Clean prices are typically quoted per $100 of face value. For example, a clean price of 98.55 means $98.55 per $100 of par — or $985.50 for a bond with a $1,000 face value. The actual cash the buyer pays at settlement (the dirty price) is this dollar amount plus accrued interest.

The Accrued Interest Formula

Accrued interest represents the fraction of the next coupon that has been “earned” by the seller since the last coupon date. It can be expressed in a general form and a practical per-period form:

Both formulas produce the same result. The practical form is often more convenient because you work directly with the coupon payment amount and the current coupon period rather than annualizing.

Where:

• Coupon Payment Per Period — the dollar coupon paid each period (e.g., for a 6% semi-annual bond with $1,000 face value: $1,000 × 6% / 2 = $30)
• Days Since Last Coupon — days from the last coupon date to the settlement date, counted using the applicable day count convention
• Days in Coupon Period — total days in the current coupon period under the same convention

Day Count Conventions

The day count convention determines how “days since last coupon” and “days in coupon period” are calculated. Using the wrong convention produces a different accrued interest amount for the same bond on the same date.

Note that the 30/360 convention has several variants (30U/360 for U.S. markets, 30E/360 for European markets) that differ in how month-end dates are handled. Always confirm which specific variant applies to the bond you are analyzing.

Clean vs Dirty Price Example

Let’s calculate the accrued interest and dirty price for a bond purchased between coupon dates:

Clean Price vs Dirty Price: What’s the Difference?

Both prices describe the same bond — the difference is whether accrued interest is included:

In most cases, the dirty price exceeds the clean price because accrued interest is positive. The exception occurs during the ex-coupon period in certain markets (such as the UK and Australia), where the buyer does not receive the upcoming coupon and accrued interest can be negative — see the FAQ below for details. On a coupon payment date itself, accrued interest is zero and the two prices are equal.

When performing yield or spread analysis, be consistent: if you input the clean price, the analytics engine must add accrued interest internally to derive the dirty price for discounting. If you input the dirty price, accrued interest is already embedded. Mixing conventions produces incorrect yield calculations — see our Bond Pricing & YTM guide for the correct approach.

How to Calculate Accrued Interest

Follow these steps to calculate accrued interest for any coupon-paying bond:

1. Identify the bond’s terms: annual coupon rate, face value, and payment frequency (annual, semi-annual, quarterly)
2. Calculate the coupon payment per period: Face Value × Annual Coupon Rate / Number of Periods Per Year
3. Determine the applicable day count convention: check the bond’s prospectus or market convention (typically 30/360 for U.S. corporates, Actual/Actual for Treasuries)
4. Count the days from the last coupon date to the settlement date using that convention. Note: accrued interest runs to the settlement date, not the trade date. In most U.S. bond markets, settlement occurs T+1 after the trade.
5. Apply the formula: AI = Coupon Payment Per Period × (Days Since Last Coupon / Days in Coupon Period)

For amortizing bonds where principal is repaid gradually over time (rather than in a lump sum at maturity), the same accrued interest formula applies but the outstanding face value changes each period. See our guide on Loan Amortization for how interest and principal are allocated in amortizing structures.

Use our TVM Calculator to value the bond’s remaining cash flows, then add accrued interest to arrive at the dirty (settlement) price.

For a complete walkthrough of bond valuation — from clean price through yield to maturity — explore our Fixed Income Investing course.

Common Mistakes

Accrued interest calculations are straightforward in principle, but several common errors lead to incorrect results:

1. Confusing clean price with dirty price in YTM calculations. Yield to maturity should be computed from the dirty price — the actual amount paid at settlement. Using the clean price as the settlement amount produces an incorrect yield. See our Bond Pricing & YTM guide for the correct approach.

2. Ignoring day count convention differences. A bond’s accrued interest under 30/360 and Actual/Actual can differ meaningfully, especially in months with fewer or more than 30 calendar days. Always verify which convention applies to the specific bond.

3. Using the trade date instead of the settlement date. Accrued interest is calculated to the settlement date, which is typically one business day after the trade date (T+1) for U.S. government and corporate bonds. Using the trade date undercounts accrued interest by one or more days.

4. Forgetting that accrued interest resets on coupon dates. On a coupon payment date, accrued interest is zero because the full coupon has just been paid. The next day, accrual starts again from zero toward the next coupon date.

5. Mixing percentage quotes with dollar prices. Clean prices are quoted per $100 of face value (e.g., 98.55), while the actual dollar amount depends on the face value of the position. A quote of 98.55 on $1,000 par means $985.50 — confusing the two leads to order-of-magnitude errors in settlement calculations.

6. Using the wrong 30/360 variant. The 30/360 family includes several variants (30U/360, 30E/360, 30E+/360) that handle month-end dates differently. Using the U.S. variant for a Eurobond (or vice versa) produces slightly different accrued interest amounts.

Limitations of Clean and Dirty Price Conventions

Convention differences across markets. U.S. Treasuries typically use Actual/Actual, while U.S. corporate bonds typically use 30/360. International bonds may follow entirely different conventions. Cross-market spread comparisons require normalizing to a common basis — see our guide on Z-Spread vs G-Spread for how spread measures account for these differences.

Ex-coupon period complications. In some markets (particularly the UK and Australia), bonds enter an “ex-coupon” period several days before the coupon date. During this window, the buyer does not receive the upcoming coupon, and accrued interest may be calculated as negative. This is a market-specific convention — U.S. Treasury and corporate bond markets do not have ex-coupon periods.

No credit risk adjustment. Accrued interest calculations assume the issuer will make the next coupon payment in full. If the issuer is in financial distress, the actual coupon may be reduced or missed entirely. Distressed bonds often trade “flat” (without accrued interest), meaning the clean price and dirty price are the same because the market does not expect the next coupon to be paid.